The Cost of Cost Savings

How Contracting Limits the Adoption of New EP Technology

Healthcare organizations face the demand to save more money every year. As a result, they have been forced to become creative when negotiating supply contracts.  Specifically, the last ten years have seen hospitals move toward market share agreements with limited vendor strategies: This means committing to the vendor that they will stay above a certain market share level, and in return, the hospital gets a discount. This is done in an effort to maximize savings and reduce supply costs. 

However, these savings are no longer something that gets credited back to the departments or organization within the hospital/hospital system: Once the savings are realized, they are considered baseline economics, and the department is expected to deliver these savings year after year. These savings are written into yearly budget projections and are counted toward operational goals often before they have been realized.  While this strategy has been very effective at reducing supply costs, the practice does create challenges for hospitals and healthcare systems that are interested in providing physicians and patients access to new technologies.

As healthcare organizations turned to group purchasing organizations (GPO) to aid them in reducing supply costs, one of the more prominent strategies was aligning market share across multiple hospitals or entire healthcare systems.  The combined purchasing power of these large groups created incentives for medical device manufacturers to radically reduce the cost of medical devices.  Initially the buying power or spend across all the participating hospitals was all the motivation that was needed, but after several years, these large purchasing groups needed to explore new contracting strategies to produce more savings. 

The strategy that most organizations started to utilize was moving procedure market share to a limited number of vendors.  For instance, in the cardiac device space the purchasing groups would commit their entire market share to just two of the five vendors manufacturing pacemakers and AICDs.  This strategy again allowed hospitals the opportunity to realize even more savings by committing a larger volume of spend to just a few vendors, rather than spreading it across four or five manufacturers.  The latest move by large healthcare systems and purchasing groups is to combine and consolidate supplies across all service lines into just a few vendors that offer the largest portfolio of medical devices and healthcare supplies. This strategy really seems to be one of the only remaining options to further reduce the costs associated with healthcare operations. 

The savings are dependent upon the hospital eliminating competitive products to meet established rebate targets.  This involves the consolidation of products under just one or two vendors for everything purchased by a hospital.  Since the scope of products is so large, there is just one or two vendors that can offer a consolidated program across all service lines.  Once a system or hospital starts to realize the savings associated with these overreaching, hospital-wide contracts, it becomes very challenging to peel away even a single product or service line to create innovation or adopt new technologies - and still realize the savings.

Since the scope of products is so large, there is just one or two vendors that can offer a consolidated program across all service lines.

The contracts have continued to become more complex with savings tied to rebates associated with spend targets.  Hospitals face challenges when new devices or procedures become available, particularly if the new technology is in competition to what is currently contracted.  Any attempt to switch or unravel the devices that are currently tied to the contracting has a much larger impact on the overall rebate structure. 

While hospitals generally have the ability to opt out of existing contracting without any penalties, the loss of the savings usually prevents organizations from exploring these options.  It is becoming increasingly difficult for service line management to offer physicians access to new and emerging technologies without a deeper analysis of how these products not only impact the organization at the procedural level, but also increase costs if rebate targets are missed.

It is becoming increasingly difficult for service line management to offer physicians access to new and emerging technologies...

This is a highly problematic dilemma for service line managers in, for example, cardiology, where hospital- or system-wide contracts are making the adoption of new technologies from others than the large vendors almost impossible. This, in turn, could impact the hospital’s ability to provide optimal care for patients, advance services, or even attract the best physicians. These are limitations that have immeasurable, but long-term economic and patient care consequences. This is too often forgotten when the hospital is asking for the procedure area to stick to hospital-wide commitments to market share.